What Role Do Banks Play in the Paycheck Protection Program?

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Due to the coronavirus pandemic, small businesses are under siege. 

They have operating expenses and short-term liabilities to pay, but with everyone staying at home, unless they're a grocery store business, there's no revenue.

That means a cash crunch and door closures.

The PPP is a loan program where Congress appropriates hundreds of billions of dollars to the Small Business Administration, which works with lenders, like large banks, to lend to small businesses in need.

These are low interest loans, where the bank borrows from the government at a low rate and re-lends to small businesses at a slightly higher—but still low—rate.

But why are banks taking on this credit risk? In recent earnings reports, banks have all announced that they set aside huge cash amounts as reserves because they anticipate many of their loans will not be repaid in full.

But good news for the banks—the government has said it will guarantee the loans, so when a business that can't pay the debt back defaults, the government insures that amount to the bank.

Meanwhile, businesses have been told that if they keep employees on staff, their loans are forgivable. This incentivizes employment, which boosts consumer spend and keeps the recession at bay. And it's all on the government's tab so the banks are largely willing to participate.

To see which banks have major roles in the program, watch the quick video above. 

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